QE fears spark threefold increase in inflation hedging

UK - Concerns from pension funds that the Bank of England (BoE) will extend the existing £375bn (€473bn) quantitative easing programme have resulted in the volume of inflation hedging increasing by threefold over the second quarter of 2012, F&C Asset Management has said.

According to a poll by the manager of investment banks' trading desks, the second quarter of the year saw £18.5bn of inflation hedging transactions conducted on the back of several new long-dated gilt issuances, increasing business threefold on the same time last year.

While inflation hedging activity was up on the previous three months to March, interest rate hedging activity remained constant over the past three quarters, according to F&C, with £12.9bn of business reported in Q2.

Discussing what he deemed "record levels" of inflation hedging, head of derivative management Alex Soulsby said: "The continuing uncertainty in economic outlook, and expectation that the Bank of England will extend QE, continue to impact how UK pension schemes manage and hedge their risk, and what instruments they are using to facilitate this."

Soulsby also referenced two long-dated gilt issuances by the UK's Debt Management Office, with F&C's survey noting a "jump in activity that can be attributed in part to the syndications".

Revisions of the UK's growth forecasts over the past few months have led to concerns that the central bank will opt for a further tranche of quantitative easing.

Minutes from the monetary policy committee show growing support for further intervention in addition to the £200bn of QE launched during the former government's time in power - and since then extended on several occasions to result in the asset repurchase facility's current size of £375bn.

QE has received a mixed reaction from pension funds in the UK, with the National Association of Pension Funds repeatedly blaming the measure for depressed gilt yields and higher deficits.

However, a study published by the BoE last week argued that the impact of its monetary easing policy had been "broadly neutral" in this respect.